Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75825
Authors: 
Stein, Jerome L.
Paladino, Giovanna
Year of Publication: 
2001
Series/Report no.: 
CESifo Working Paper 469
Abstract: 
We provide benchmarks to evaluate what is an optimal foreign debt and a maximal foreign debt (debt-max), when risk is explicitly considered. When the actual debt exceeds debt-max, then the economy will default when a bad shock occurs. This paper is an application of the stochastic optimal controls models of Fleming and Stein (2001), which gives empirical content to the question of how one should measure vulnerability to shocks, when there is uncertainty concerning the productivity of capital. We consider two sets of high- risk countries during the period 1978-99: a subset of 21 countries that defaulted on the debt, and another set of 13 countries that did not default. Default is a situation where the firms or government of a country reschedule the interest/principal payments on the external debt. We thereby explain how our analysis can anticipate default risk, and add another dimension to the literature of early warning signals of default/credit risk.
Subjects: 
Default risk
foreign debt
stochastic optimal control
debt rescheduling
uncertainty
Document Type: 
Working Paper

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